Volkswagen Price Target Cut As Analysts Play Catch Up

Since Volkswagen was first accused of and then admitted to using technology to deceive emissions testers into thinking that its diesel-powered vehicles had emissions levels that were within allowable levels, its stock has been in a downward spiral. Shares recovered somewhat on Thursday, but they’re back in freefall again today after a price target cut from HSBC Global Research.

Germany-listed Volkswagen shares slipped as much as 3.66% to €114.55 per share. Because of the emissions scandal, the HSBC team cut their target price from €227 to €122 per share and reiterated their Hold rating on the stock.

Will things get worse for Volkswagen?

It’s now been a week since the allegations against Volkswagen surfaced, so investors and analysts have had some time to chew on them. Last week Friday, the U.S. Environmental Protection Agency publicly accused Volkswagen of violating the Clean Air Act by using deceptive software in about 500,000 of its diesel-powered vehicles.

However, the German automaker updated the number of vehicles the deceptive software was installed in to a staggering 11 million earlier this week, worsening the problem significantly. So the question now is whether the problem could possibly get worse.

Volkswagen brand takes a huge hit

In a report dated today, HSBC analyst Horst Schneider and team at HSBC considered this question and said their biggest concern right now is that Volkswagen’s reputation is now severely damaged. In fact, they think the damage is so bad that it could end up having a worse impact on the company in the long run than any fine levied on it might have.

Some firms estimated that the fine could go as high as $18 billion in a worst-case scenario, and the EPA said penalties could amount to as much as $37,500 per car. HSBC, however, thinks the average fine will be “much smaller” because of a “special scaling factor.” The assumption is €1.5 billion in fines, with most of them being levied in the U.S. Volkswagen said this week that it has set aside €6.5 billion to deal with the legal problems associated with the deceptive software.

Why the reputational damage might be so much worse

The reason HSBC analysts believe that the damage to Volkswagen’s reputation could be much worse than any fine levied against it is because the company has very high costs in Europe. As a result, the Volkswagen brand must remain strong in order to convince consumers to pay premiums for its cars. If the German automaker’s reputation is damaged too much, consumers will no longer be willing to pay such high premiums for its cars.

Further, the HSBC team notes that shakeups in management at Volkswagen will likely increase the turmoil at the company. CEO Martin Winterkorn has already resigned, and more top executives could step down as well because of the scandal.